Bonds Jul 13

GF Securities under administration, activities frozen

Guangdong regulators have suspended the brokerage and punished eight staff for fake listings for a Chinese company totalling 88.6 billion yuan ($12.65 billion) between 2016 and 2018

GF Securities under administration, activities frozen
People queue at a stand for GF Securities during an expo in Guangzhou city, in southern China's Guangdong province in June 2019. Shenzhen- and Hong Kong-listed GF Securities announced in August last year that the securities watchdog has decided to restrict its expansion after one of its hedge funds suffered huge losses and blew a hole in the brokerage's bottom line. Now another huge fraud has been discovered. Photo: Lang Xinchen / Imaginechina via AFP.

(ATF) More than two dozen Initial Public Offerings have been withdrawn from GF Securities after the firm was accused of being involved in a serious fraud case earlier this year.

The Guangdong Securities Regulatory Bureau decided to freeze GF Securities' orders till the firm decided to "correct itself".

The case involved one of China’s biggest listed pharma firms, Kangmei Pharmaceutical Co Ltd, a domestic drugmaker, and allegations a financial reporting fraud involving 88.6 billion yuan ($12.65 billion) in overstatements between 2016 and 2018.

Regulators found that the company used fake bank deposit slips to inflate cash reserves, forged documents for nonexistent business activities and transferred company funds to related parties to trade in its own stock.

The details of the punishment levied on Kangmei are not fully known. The company looks to have been fined, but may have managed to avoid serious sanction. However, GF Securities appears to have been blamed for its failure to do proper due diligence under the new hardline approach of regulators, who are determined to crack down on fraud that undermines their capacity to attract large amounts of capital within the country and from abroad and say they will have 'zero tolerance' on legal violations. 

ALSO SEE: Officials vow 'zero tolerance' over capital market violations 

This prompted Guangdong regulators to issue GF Securities and related personnel with an "Advance Notice of Administrative Supervision Measures".

The Regulatory Bureau decided to freeze GF Securities' orders, suspend its qualifications for six months, block it from accepting relevant documents related to bond underwriting for 12 months, and ordered supervision measures that restrict the rights of senior management personnel.

Those facing punishment include the former deputy general managers Ouyang Xi and Qin Li, who were in charge of the relevant investment banking business, who were restricted from receiving remuneration – salary that was received should be returned to the company. They were also publicly condemned by the Securities Regulatory Bureau.

Eight staff accused

Eight individuals have been accused of direct responsibility – Chen Jiamao, Lin Huanwei, Zhu Baoli, Xiao Jin, Lin Huanrong, Xu Gewen, Li Xianbing, He Kuanhua – and taking inappropriate action.

From the day when the regulatory decision is made, they shall not act as sponsors of IPO listings or be involved bond underwriting or duties related to investment banking.

Previous cases have shown that this type of punishment has the most serious impact on investment bank projects – in addition to the damage to the securities firm's finances and reputation.

According to an investigation by the Brokerage, a Chinese financial news analyst firm, GF Securities were sponsoring the underwriting of 23 IPO projects – nine for main boards, five for small and medium-sized boards, six for the GEM (Growth Enterprise Market) and three for science and technology boards.

GF Securities is also currently involved in refinancing for three projects.

On the evening of Friday July 10, GF Securities issued an announcement to say it had received the "Advance Notice on Administrative Supervision Measures" from Guangdong Securities Regulatory Bureau.

After investigating, the bureau found that GF Securities was involved with Kangmei Pharmaceutical's 2014 non-public issuance of preferred stock projects, plus its 2015 corporate bond projects, its 2016 non-public issuance of stock projects, and its 2018 corporate bond projects.

Due diligence was not performed on Kangmei Industrial, allegedly because of a lack of good practice, inadequate internal quality control, so continuous supervision and management obligations were not fulfilled, as required, the bureau said.

'Ten to 20 year bans'

In the end, Guangdong regulators decided to adopt rectification measures against GF Securities – to suspend their qualifications to sponsor IPOs for six months, ensure that they refrain from accepting documents for the bond underwriting business for 12 months, and ordered supervision measures to restrict the rights of the firm's senior managers.

The two deputy directors in charge of investment banks were also publicly condemned by the Securities Regulatory Bureau and punished for supervisory talks.

The eight people deemed directly responsible persons, such as the sponsor of the GF Securities Investment Bank project, sponsor representatives, bond project sponsors, and the head of the investment bank department, were deemed as unsuitable for such work for 10 to 20 years from the day when the regulatory decision is officially confirmed.

Two of them – Lin Huanrong and Li Xianbing – were banned from the bond underwriting business for 20 years.

Wind data shows that in terms of bond underwriting, GF Securities has underwritten a total of 472 bonds this year, underwriting more than 73 billion yuan. This amount ranked 14th in the industry, down from 11th last year.

The number of underwriting bonds rose from 16th to 11th, compared to last year's industry rankings. But the suspension of GF Securities' bond underwriting business for one year will greatly affect the amount of income it can generate from that business in the future.

In terms of refinancing projects, as of now, GF Securities has only one company willing to use GF to list its firm – Dream Lily Home Technology, which has now passed a review meeting.

Last year, GF Securities' refinancing business raised a total of 6.932 billion yuan, and the underwriting amount ranked 14th in the industry. But, after the counterfeiting case involving Kangmei Pharmaceutical, many other companies have shifted to other brokers.

ALSO READ: China finance sheriff warns banks not to cause 'chaos'